Outlook remains positive
- 1H22 DPU of 2.97 Scts was broadly in line at 51.2% of our FY22F forecast.
- Robust demand continues to drive portfolio occupancy.
- Reiterate Add rating with an unchanged DDM-based TP of S$1.29.
1H22 results highlights
KREIT reported 1H22 gross revenue of S$109.8m, +3.7% yoy, while distributable income grew 4.6% yoy to S$110.5m. The improvement was due to contributions from Keppel Bay Tower (KBT) from May 21 and higher income from Ocean Financial Centre (OFC), 8 Exhibition St and Pinnacle Office Park, partly offset by a weaker A$. DPU came in at 2.97 Scts, +1% yoy. KREIT revalued its portfolio up by 1.8% in 1H, boosting BV/unit to S$1.33.
Higher portfolio occupancy on robust demand
Portfolio committed occupancy rose qoq to 95.5% at end-1H. Together with leases under various stages of documentation/negotiation and a robust demand outlook, we believe portfolio committed occupancy is likely to trend up in coming quarters. KREIT renewed/leased 881.9k sqft of space in 1H22 (2Q: 406.9k sqft) at an average rental uplift of about 8.7% (2Q: +7.5%). An estimated 76% of leasing activities were renewals. New leasing demand came from technology, media and telecoms, banking and financial services and real estate and services sectors. As at end-1H22, KREIT had 4.9% of leases to be renewed/reviewed in 2HFY22F and a further 13.2% in FY23F. Expiring rents for 2HFY22F averaged S$9.82psf, and S$10.81psf in FY23F. To manage rising operating costs, KREIT was able to pass on the higher costs in the form of increased service charges for some of its Singapore leases. Meanwhile, in Australia, leasing of vacated space at 8 Chifley Square in Sydney progressed with occupancy recovering to 82%. The development project, Blue & William, is c.48.7% constructed and is on track to be completed by mid2023F.
Lower gearing post revaluation exercise
KREIT’s aggregate leverage stands at 37.9% as at end-1H22 following its revaluation exercise. Average all-in interest cost rose qoq to 1.93%. An estimated 73% of its debt are on fixed rates and management indicated that a 50bp hike in funding cost could erode its DPU by 0.12 Scts (or c.2.1% of FY21 DPU). In terms of forex exposure, KREIT indicated that it has hedged 50-80% of its A$ exposure over a 12-18 month period.
Reiterate Add rating
We leave our FY22-24F DPU estimates unchanged and retain our DDM-based TP of S$1.29. Potential catalysts include the redeployment of divestment proceeds to new accretive acquisitions and a better-than-projected office rental market, while downside risks include longer-than-expected frictional vacancy from tenant movements due to a slower-than-expected backfilling of office space.
